World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Sunday, October 23, 2011

In that article I posted a couple of very important charts that reinforce the concept of Macroeconomic Debt Saturation. While I have provided much evidence that debt saturation has occurred, it’s such an important topic that we need to keep examining it until it is embedded into the psyche of the world – it puts the lie to the current economic disinformation propagated by those who are willing to prop up the flawed central banker box at any cost. Those closest to the production of money profit, and thus the incentives to keep false constructs alive are strongest the closer you get to that money production. Humanity, however, is working to unravel their misdeeds and set in place a proper rule-of-law.

The concept Diminishing Returns of Debt goes side-by-side the concept of Debt Saturation. Together, these are the most important economic concepts of the past century as they unravel a century’s worth of disinformation designed to keep humanity working (and dying) on behalf of those who possess the money creation power. I wrote about Diminishing Productivity of Debt in my articles THE Most Important Chart of the Century, and it’s follow-on Guest Post and More on THE Most Important Chart of the Century.

Let’s connect definitions to those terms:

DEBT SATURATION - Occurs when collective income can no longer service more principal and interest under current credit terms & conditions. Debt saturation can occur for you personally, for your family, and it can occur for the people collectively. It can also occur, and has occurred, for local municipalities, city, state, and Federal governments, as well as corporations (financials in particular). Because the same income earners ultimately are responsible for all these debt (a key concept), there is a point that occurs overall, that point I call Macroeconomic Debt Saturation. Debt saturation can occur and then recur as credit terms are changed - for example, the lowering of interest rates moves the allowable amount of debt prior to reaching saturation up.

DIMINISHING PRODUCTIVITY OF DEBT - Is the phenomena of decreasing real productivity gains for a given amount of debt creation. In a non-saturated economy, the introduction of credit does work to increase productivity. However, approaching the Macroeconomic Debt Saturation point, the productivity gain begins to decrease, and at the saturation point is zero, turning negative as we get beyond the Debt Saturation point.

For example, in the year 1920 (only seven years post “Fed” creation), one dollar of credit may have produced three dollars or more worth of gains in productivity. China is a part of the world that until recently was unsaturated, but then got fast and easy gains in productivity through massive credit growth, and are probably already debt saturated themselves. In the U.S., we added layer upon layer of credit and other forms of leverage and are now far beyond the debt saturated level where the addition of debt actually subtracts from real economic activity.

This can be seen in the Diminishing Marginal Productivity of Debt chart, whereby the beginning of 2010 each dollar of debt added to our economy was subtracting 45 cents worth of productivity!

Any economist worth their salt should have seen this diminishing return and debt saturation problem coming – very few did, and none properly verbalized it. Mechanically what is happening is that because the vast majority of our money is debt, when new debt (money) is introduced beyond the saturation point, instead of going to create new factories, infrastructure, etc., that new money/ debt is instead needed to service prior existing debt. Thus money no longer circulates (falling velocity), and instead simply circles right back around to the bank to service existing principal and interest.

Currently the mainstream has completely misdiagnosed this, and like beating their heads against an immovable wall, keep trying to add more debt into the debt saturated condition. Yes, that used to work to “stimulate” the economy, but that was on the front side of the “Debt Curve,” before reaching the Debt Saturation Point. We are now well past saturation, still climbing the front side of the “Debt Curve,” awaiting the plummet off the back.

This Debt Curve I drew is not just hypothetical, below is a chart showing total government debt versus GDP. Keep in mind that the government is VASTLY understating its debt, and is VASTLY overstating “productivity.”

Government Debt Vs. GDP:

If you make GDP on that chart really “real,” that is you adjust for true inflation, then you will find that productivity peaked a long time ago and is continuing to fall today – more like the chart I drew. False statistics are a part of the problem, they mask reality and make it difficult to pinpoint problems, and thus create meaningful solutions (remove those who produce money to their benefit).

When examining debt, it is wise to always consider the income that is there to support that debt. Unfortunately, debt has been allowed to far outstrip income. An important concept is that Debt Saturation actual works to cap income - this is because the weight of carrying more and more principal and interest stifles real economic activity! And this is why increasing debt into a debt saturated condition actually causes unemployment to worsen. Note in the chart below how Federal Receipts have stagnated in relation to Federal Debt, that is a debt saturated condition:

Index of Federal Receipts Vs. Federal Debt:

Note in the chart above that these values have been indexed in order to get them on the same scale - in reality income is much smaller as a percentage of debt with Federal Receipts only $2.5 Trillion.

Today, we know that our advertised current account deficit is pushing $15 Trillion. However, that fails to count the off balance sheet trillions held on our behalf at the Freddie and Fannie dumping grounds, and also the unfunded liabilities that also are neglected on .gov books, but are most definitely required to be reported on your business’s books. If we take the advertised figures for GDP and divide it by the total government debt, you also get a downward slopping curve that shows basically the same effect as the Diminishing Productivity of Debt chart above:

GDP Divided by Government Debt:

Note that this figure is nearing zero – that is the point were total confessed debt equals the trumped up GDP – said another way, debt to GDP is approaching 100%. First of all, it’s not true, real debt passed real GDP a long time ago, but more importantly why is this dangerous? It’s dangerous because the cost to carry that debt gets exponentially heavier. In fact, today I can summarily state that our nation’s interest expenses exceed our nation’s income via taxes! That’s right, more than 100% of our nation’s income goes to pay interest – not the trumped up $400 billion advertised by .gov and the “Fed,” but because we spend trillions to artificially buy down interest rates, that money in reality is an interest expense, and it equals more in total than the U.S. takes in via taxes.

Even if you take the advertised Federal Expenditures and subtract them from Federal Receipts, it’s quite easy to see that you’re looking at a government in failure mode:

Federal Receipts Minus Federal Expenditures:

It’s really important at this point to again point out that lying is a cooperative act – it takes two people to make a lie, one who dishes it out, and one to believe it. That chart above is much worse than that in reality, it’s far more negative. It’s time for everyone to stop being a willing party to the lies!

In the diminishing productivity charts above, we had divided GDP (supposed productivity) by debt. But funny thing, since all our money is debt, what do you suppose happens when we divide GDP by our money? Why we get the same exact diminishing returns effect, thus it’s not just diminishing returns for debt, but it’s also diminishing returns for our money!

GDP Divided by Base Money:

GDP Divided by MZM:

And going further back in time;

GDP Divided by what was M3:

This highlights the problem with money as debt, you cannot pay down the debt without getting rid of money! Thus once you are saturated with debt, it is impossible inside of the debt is money paradigm to unsaturated yourself! Just look at Japan! Again, what’s important is WHO controls and benefits from the production of money – that’s where the real root of the problem lies. The only way out, is to get outside of the central banker box, and that means producing money that is not backed by debt that benefits only a few.

A portion, at least, of that sovereign money, then, must be used to swap out the debt saturated condition. This CAN be accomplished in such a way as to make the purveyors of fraud take their pain, and simultaneously freeing the rest of society from the shackles that is macroeconomic debt saturation. In my next article I will once again explain how, by summarizing and updating the main points in Freedom’s Vision.

Next time you are confronted with an economist, politician, or mainstream media person who doesn’t get it, ask them to explain Macroeconomic Debt Saturation and the associated Diminishing Returns of Debt – I’ll wager you get blank stares, point them to this article!